Warren Buffett, through his Berkshire Hathaway Inc. holding company, has joined two other investors in a plan to invest about $500 million in Level 3 Communications Inc. (Nasdaq: LVLT). Level 3, a company that wholesales bandwidth to other carriers, says it plans to use the funds for more acquisitions (see Level 3 Raises $500M).

Of late, Level 3 has been trying to avoid violating the terms of its covenants for more than $6 billion in long-term debt (see Is Level 3 Next?). Those covenants call for Level 3 to meet certain revenue minimums in its telecom business. Level 3 thinks that one way it can increase revenues, even as the telecom industry flounders in recession, is to buy existing companies (see Level 3 Software Play Has Perils).

Wall Street reaction to the investment was mixed, and some wonder whether taking on more debt to solve debt problems is sound strategy. "I think it's great that [Level 3] got more money, but it's negative that the money has come in the form of more debt," says Rick Grubbs, a senior telecom analyst at Crédit Lyonnais Securities Inc.

Level 3 executives say that both it and its investors would have preferred an equity investment; however, as a company incorporated in Delaware, a provision in Delaware's securities law prevented it.

The investment is an interesting one for Warren Buffett, who has always stuck to investing in name-brand businesses that he understands, such as The Coca-Cola Company; GEICO Corp., the insurance company; and See's Candies Inc. Buffett, a frequent bridge partner of Microsoft Corp. (Nasdaq: MSFT) chairman Bill Gates, admits he's a "lifelong technophobe" and encourages potential correspondents to write him via postal mail, not email, according to a note to readers of Berkshire Hathaway's Website.

Buffett was introduced to the deal by his friend Walter Scott Jr., Level 3's chairman, according to Level 3.

The specifics of the investment are as follows: Level 3 is selling 9 percent junior convertible subordinated notes, due 2012, to three investors. Longleaf Partners is buying $300 million of the convertible notes; Berkshire Hathaway is purchasing $100 million; and Legg Mason Inc. is buying $100 million.

The notes mature in 10 years and pay 9 percent interest. The investors may convert the notes, at any time, into common stock at a price of $3.41 a share, subject to certain terms.

"If [the investors] converted the shares quickly and held on to the stock, I'd be pretty happy about that," says Grubbs. Such a move, Grubbs says, would signal that Level 3's new investors have a good deal of confidence in the company's long-term survival.

The notes purchased by the three investors can also be changed, at Level 3's option, into convertible preferred stock under certain conditions. Convertible notes rank junior to just about all of Level 3's existing indebtedness. In other words, the new investors will have to get all Level 3's senior creditors in line if dividends are paid or if Level 3 liquidates its assets.

Level 3 says all three investors have indicated they would consider possible additional investment in the company in the future.

With its new investment, Level 3 says it has a balance of about $1.5 billion in cash and marketable securities as of June 30.

During a conference call Monday afternoon, Level 3's chief executive James Q. Crowe emphasized that the new investment was to expand an already viable and healthy business. "Even absent this investment, we think Level 3 is fully funded to cash-flow break even," he said. "So the proceeds of this investment are intended to create additional opportunities."

Shares of Level 3 rose $1.47 (51%) to $4.36 in trading Monday, the highest they've been since June 3.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com